Should You HODL Bitcoin?

First, know your memes. HODL began as a typo for the word "hold" on a bitcointalk.com forum, and the crypto community found it so amusing that they know use "HODL" as a term to denote holding (rather than selling) one's cryptocurrency.

Last December, bitcoin brought seasonal cheer to investors as its price gathered pace and broke records. The heady run-up in its price had bitcoin enthusiasts making wild forecasts about its price down the line.

Three months later, their prognoses are gloomier. If bitcoin were a stock, its price movement this year would be cause for serious concern. The cryptocurrency’s price is down by more than two-thirds from its December high and roughly 47 percent off from the start of this year. In monetary terms, this means that an investment of $100 in bitcoin at the beginning of this year would be worth $53 right now.

Naturally bitcoin’s price movements this year have forced investors to reconsider their opinion about the cryptocurrency. Here’s a brief recap of the bull and bear case for bitcoin. Should you HODL?

The Bear Case For Bitcoin

Several factors are weighing on the current price of bitcoin. For starters, a steady stream of hacks and scandals from within the cryptocurrency ecosystem has ensured that the currency's reputation as a venue for criminal activities persists. The most prominent example this year was the case of the Japanese exchange Coincheck, where hackers made off with $500 million worth of cryptocurrency. (See also: Coincheck May Have Suffered The Worst Hack In Cryptocurrency History). The price for bitcoin slid along with that of other cryptocurrencies. The introduction of bitcoin futures (and the entry of institutional money into its ecosystem) was supposed to cut back on volatility. As recent events have proved, however, futures may themselves be responsible for injecting volatility into the system.

Regulators and economists across the world have added to the pressure by criticizing bitcoin in public forums. Their stance has made governments wary of bringing bitcoin under a legal cover. (See also: Bank of England Exec Calls Bitcoin A Failure).

Online platforms, which enthusiastically embraced bitcoin after its launch, have joined bitcoin bears and imposed restrictions or dropped cryptocurrencies from their ecosystems altogether. Alphabet Inc. subsidiary Google (GOOG), Facebook Inc. (FB), Twitter Inc. (TWTR), and Reddit are among some of the big names that have curbed cryptocurrency ads and have all but blocked bitcoin payments.

Even positive news comes with an undercurrent of skepticism. For example, bitcoin’s transaction fees, whose high price was considered a deterrent to mass adoption, fell. But that decline was accompanied by a corresponding slide in volumes. Technological solutions, such as adoption of the Lightning Network and Segregated Witness, were supposed to be a panacea to bitcoin’s scaling problems because they speed up the network. But they currently are responsible for processing only a minuscule amount of transactions. (See also: Bitcoin's Lightning Network: Three Possible Problems).

The Bull Case For Bitcoin

The primary bull case for bitcoin is based on the virtues of patience. It points to the cryptocurrency’s previous price action as proof that bitcoin’s price will rise again.

Among the most prominent proponents of this theory is noted analyst Thomas Lee, head of research at Fundstrat Global Advisors, who advises holding bitcoin. “Market timing is generally discouraged in traditional equity investing. If an investor missed out on the 10 best days (for S&P 500) each year, the annualized return drops to 5.4 percent (ex-10 best), from 9.2 percent. In other words, the case for buy and hold in equities is the opportunity cost of missing out on the 10 best days,” he wrote in a recent note. He applied the same logic and wrote that annual returns for bitcoin drop to 25 percent annually if investors remove the 10 highest performing days each year from the equation. In fact, according to Fundstrat data, bitcoin’s returns are negative if one excludes the top 10 day gains. Lee has a midyear price target of $20,000 and an end of year target of $25,000 for bitcoin.

A cursory look at bitcoin’s price charts confirms Lee’s thesis. Bitcoin’s growth has indeed occurred in spurts rather than in a steady stream. For example, its price saw a 30 percent gain between Oct. 28 and Nov. 5 last year. That figure jumped to 50 percent between Dec. 5 and Dec. 15, last year, when bitcoin’s price jumped to $17601.44.

Recent actions by governments and regulatory agencies also indicate a thawing of positions related to cryptocurrency in the future. For example, Cboe has taken the lead in prodding the SEC to introduce bitcoin ETFs, which will introduce further liquidity into bitcoin’s ecosystem. Technical developments within bitcoin’s network also point to a brighter future. The list of nodes accepting Lightning Network is increasing. Large platforms, such as Coinbase, have begun implementing SegWit technology. For believers in a future rise of bitcoin’s price, these measures may help avoid the problems that plagued bitcoin as its price skyrocketed last year and may ensure a firmer support level for future gains.

The Bottom Line

Bitcoin’s price has been on a rollercoaster ride for the last year. But the current slide in its price has given investors reasons to reconsider their stance, given that it comes after a prolonged period of growth. The bulls are of the opinion that bitcoin’s price follow a predictable pattern based on previous trends and that it will rise again. The bears, however, point to increasingly negative sentiment and scandals associated with the original cryptocurrency to make their case for selling bitcoin.

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